Feuding between Iraq and Syria continued to block formation of a common front of Arab countries opposed to Egypt's Middle East peace efforts early today, but leaders of the divided Palestinian movement unexpectedly announced a reconciliation.

Well after midnight, delegates from the five militant Arab countries that have been meeting here since Thursday, began what was believed to be a final round of talks in their efforts to produce a joint agreement against President Anwar Sadat's go-it-alone diplomacy.

Conference sources said the low-level Iraqi delegation had dropped its previous insistence that Syria formally rule out any future negotiations toward a Middle East peace.

But the Iraqis were said to be still insisting that they needed more time to study the full ramifications of a so-called "confrontation front" that the other participants want to set up to oppose Sadat.

Apparently at stake was not so much the contents of the agreement itself as Iraq's desire to have the document signed at a follow-up summit meeting it is trying to arrange for Baghdad in several days.

Iraq and Syria have quarreled almost constantly in recent years in their struggled to win leadership of Arab militancy. Iraq reportedly feels that requiring Surian President Hafez Assad to come to Baghdad to sign the agreement would make it more acceptable as well as enhancing Iraq's leadership claim.

Sources here said that the Iraqis had underscored their claims to leadership by demanding that "everything that is Arab in Cairo" be transfered to Baghdad. At present, the 22-nation Arab League is headquartered in the Egyptian capital, as are othe Arab organizations.

As midnight passed and delegates began to arrive for the session that had been scheduled to start four hours earlier, Libyan demonstrators yelled their encouragement from outside the walls of the ornate Moorish People's Palace.

Even if the leaders of Algeria, Iraq, Syria, Libya, South Yemen and the Palestine Liberation Organization reach an agreement, the five-day deadlock that preceded it is unlikely to give credence to any future claims of unity.

Seeking to set an example for the chiefs of the national delegations, the hitherto divided Palestinian guerrilla movement formally - and perhaps only temporarily - announced an end to its differences.

In what could be a significant shift, Yasser Arafat's mainstream Palestine Liberation Organization aligned itself with the hard-liners opposed to any recognition of Israel or dealings with the Hewish state.

The Palestinian announcement, however, like so much else in Arab diplomacy, was open to differing interpretaions.

On face value, the document, allied the PLO with the so-called "rejection front" that opposes any dealings with Israel.

Gone was the gradual softening of Arafat's approach over the past 18 months, culminating in ABC interview in September offering to recognize Israel's right to exist in exchange for Israeli recognition of the PLO.

Today's statement, presented by the PLO at a news conference here, was praised by George Habash of the Marxist Popular Front for the Liberation of Palestine as a major victory for the "rejection front."

The PLO called for a "front of defiance and confrontation" against "all Zionist-Imprialist solutions."

It rejected not only the Geneva conference formula for a Middle East settlement, but "all international conferences" based on U.N. Security Council Resolution 242.

That 1967 resolution guaranteed Israel secure and recognized frontiers in exchange for Israeli withdrawal from occupied Arab territory.

Also redolent with "rejectionist" language was the communique's insistence that the establishment of a Palestinian mini state in the Gaza Strip and the West Bank of the Jordan River would not involve Palestinian recognition of Israel.

The communique also called for a "political boycott" of the "Sadat regime," rather than of Egypt itself. This was a nuance to show that the Palestinians' argument was not with the Egyptian people, but only with their leader.

Observers were convinced that the Palestinians' communique was in fact as critical of Syria and Iraq as of Sadat.

One paragraph called for the "complete condemnation of any Arab party that refuses the establishment of the new front," a clear indictment of Iraqi stonewalling here.

The anti-negotiation stand was cleary addressed to Syria, which alone of the Tripoli participants wants to keep all options open.

Further clouding the import of the Palestinian's communique was the fact that an Arafat aide rather than Arafat himself signed it in the name of Fatah, the largest single group within the PLO.

Arafat was inside the conference where the participants were working on the text of a much more moderate general conference agreement

[TEXT OMITTED FROM SOURCES] ty add three.

This, however, is standard operating procedure when the mainstream Palestinians want to satisfy several competing constituencies simultaneously.

Khaled Fahum, president of the Palestine National Assembly, brushed aside suggestions that the statement committed the Palestinians to the rejectionist theses of Habash.

"We do not refuse negotiations. We are being refused," he said in alluding to Sadat's contemptuous dismissal of the PLO during and since his visit to Jerusalem.

A high Fatah official said that from the start of the conference Libyan leader Muammer Qaddafi and Algerian President Houari Boumediene had urged the Palestinians to sink their differences to lend credence to the anti-Sadat strategy.

"It's a package deal," He explained, suggesting a tradeoff with the more moderate tone of other participants at the meeting.

Naef Hawatmeh, leader of the hardline Democratic Front for the Liberation of Palestine, summed up Paletsinian thinking: "The Syrians say the negotiating option is in the refrigerator and we say it should be thrown out because if it is in the refrigerator it can be taken out one day.